Insurtech unicorn Digit Insurance on Tuesday filed the draft red herring prospectus (DRHP) with the Securities and Exchange Board of India (SEBI) for its initial public offering (IPO).
Go Digit Insurance’s IPO consists of a fresh issue of shares worth Rs 1,250 crore while existing shareholders will sell up to 109.4 million shares (offer of sale), as per the DRHP.
The company may sell around Rs 250 crore of shares in a pre-IPO placement, therefore, share sales in the issue will be lower if the pre-IPO happens.
The Fairfax-backed insuretech company, founded by insurance veteran Kamesh Goyal, offers a full stack digital platform with insurances across motor, health, travel, property, marine, liability and other segments.
Currently, Go Digit Infoworks holds a majority stake in Digit Insurance. Shareholders of Go Digit Infoworks include Kamesh, Oben Ventures (Kamesh+Sameer Bakshi’s company), and FAL Corporation (part of Watsa’s Fairfax Holdings).
Here are some key takeaways from the DRHP:
A “delayed” path to profitability
The company incurred a loss after tax of Rs 295.86 crore in FY22, Rs 122.76 crore in FY21, and Rs 175.24 crore in FY20. As per the DRHP, it expects to continue to make significant investments (in technology and distribution networks) to further expand the business. However, despite these investments, it may not succeed in increasing its revenue on the expected timeline or in an amount sufficient to achieve profitability.
Additionally, as a listed company, the firm expects to incur significant legal, accounting and other expenses. In case its revenue declines, Digit may not be able to reduce costs in a timely manner because many of its costs are fixed, at least in the short term.
Pending legal proceedings against promoters
The DRHP reveals that criminal proceedings have been filed against its promotor Kamesh Goyal to a matter arising during his tenure as a CEO at Bajaj Allianz General Insurance, wherein the customer claim was repudiated due to a pre-existing disease. A stay order has been granted by the Allahabad court.
However, in an event of any adverse order passed against Kamesh, the courts may impose a penalty or imprisonment which may have a “material adverse effect on company’s reputation and him continuing as a promoter and non-executive chairman”.
Another criminal proceeding has been filed by Gold Circle Partners against Digit’s nominee-non-executive-director Chandran Ratnaswami, in his capacity as a director of Thomas Cook.
SEBI has also issued a show cause notice (October 8, 2021) against Fairfax Financial Holdings Limited (FFHL), the parent entity, alleging violation of Regulation 7B of the SEBI Regulations, 1996. It alleges that FFHL holds over 10% voting rights in an asset management company and the trustee company of one mutual fund, which is an associate of the sponsor of another mutual fund.
A settlement application (June 3, 2022) has been filed by FFHL.
Overall, there are a total of 19 proceedings (3 tax, 10 statutory and regulatory, and 6 material civil litigations) filed against Digit Insurance, involving Rs 34.8 crore; and 10 proceedings (including 4 criminal) against its directors and promotors, involving an aggregate amount of Rs 71.4 crore.
Digit’s premium rates may go up
The company says it may be “compelled” to increase the amount allocated to cover policy claims, increase premium rates or adopt tighter underwriting standards to ensure that its premiums adequately cover losses and expenses.
“This may result in a decline in new business and renewals, and could have a material adverse effect on our business, result of operations and financial condition,” the DRHP said. The company’s loss ratio in FY22, 21, and 20 was 74%, 74%, and 75%, respectively.
The need for additional capital
While the company expects its cash on hand and cash flow from operations to be adequate to fund its existing commitments, its ability to incur borrowings depends, in part, upon the success of its operations.
“Our present capital is insufficient to meet future operating requirements (including regulatory capital requirements) or to cover losses,” it said,
The company, in the past, has funded its operations and capital operations primarily through equity issuance. Going forward, it may restrict the types of investors for equity financing, in particular foreign investors, it said.
Challenge to retain key distribution partners
Digit distributes its products through individual and corporate agents, brokers, POSP and motor insurance service providers (collectively called Key Distribution Partners (KDP). It competes with other insurance companies and similar financial institutions to attract and retain such partners as they are allowed to engage with other players (competitors) as well.
“As a result, if we are unable to maintain relationships with our current individual agents or incentivise them to allocate a greater share of their business to us rather than to our competitors, maintain and enforce our relationship or maintain the competitiveness of our products, it could have an adverse impact on our business, profitability, and results of operations,” it said.
As of March 31, 2022, Digit has approximately 32,613 partners including approximately 30,960 POSPs, as well as individual agents, corporate agents, brokers and others.
Focus on a single product, concentrated regions
In FY22, 2021, and 2020, motor insurance accounted for 79.6%, 87.6% and 92.6% of Digit’s Net Earned Premium (NEP), respectively. Therefore, any adverse change in consumer demand for motor vehicles in India and/or any unfavorable change in government policies may have a major impact on its overall revenues.
Hence, it would be important for Digit to develop and exploit opportunities and create new products.
Further, Karnataka, Maharashtra and Delhi, combined, accounted for 58.5% of Digit’s revenues in FY22, which signifies heavy reliance on limited regions.
Risk of an “unknown” third party controlling entity
Currently, Go Digit Infoworks Services Private Limited (GDISPL) holds a majority stake in Digital Insurance. Together, Kamesh, Oben (Kamesh is the majority designated partner), and FAL Corp, respectively, hold 14.96%, 39,79%, and 45.25% of the equity share capital of GDISPL.
On June 7, 2022, Digit applied to the IRDAI, seeking its approval for conversion of the 7,800,000 Compulsory Convertible Preference Shares (CCPS), held by FAL corp, into equity shares of GDISPL.
The promoter of FAL Corp is Fairfax Financial Holdings Limited, which is listed on the Toronto Stock Exchange.
However, the IRDAI communicated that this application cannot be considered by it, since the proposed conversion of the CCPS would result in GDISPL becoming a subsidiary of FAL Corp which is not allowed under the IRDAI regulations.
“While upon the CCPS conversion, none of our promoters shall cease to act as promoters of our company, and our company and our promoters intend to continue to engage with the IRDAI in relation to such conversion of CCPS, we cannot assure you that the IRDAI will approve such conversion in the future. Consequently, we cannot assure that the CCPS will be converted by FAL Corp in a timely manner, or at all.”
Further, each of FAL Corp and, subject to FAL Corp’s consent and right of first refusal, Kamesh and Oben have the ability, should they choose to do so, to sell their respective shareholding in GDISPL to a third party, which, if sufficient in size, could result in a change of control of our company,” it said.
In the event of any such sale, Digit Insurance may become, jointly or solely, subject to the control of a presently unknown third party.